The Cheap Money Tidal Wave
Something awful is afoot. Homebuilders sales fell by 5-10% last week. Over in the US housing market, sales of existing homes just slumped at their fastest rate in 16 years according to data released Tuesday. Consumer confidence sank to a two-year low. The International Monetary Fund (IMF) warns that "Global markets face a protracted adjustment, triggered by the collapse of the subprime US housing market." In truth, the cold, hard, ugly fact remains: protecting your money is your own affair, gentle reader. Any promise of a future return guarantees that your cash is at risk...even if it's just sitting "safe" in a low-interest bank account!
- Something awful is afoot, we think. But what? In every direction we look, we see people going about their business as if nothing were wrong.
- And all the while, people still say and do such strange things!
- Mark Clare, chief executive of
Barratt Developments, told investors this morning that the homebuilder’s sales fell by 5-10% last week. "We would normally expect an uplift in volumes from the second week in September," he sighed, blaming "the Northern Rock issues."
- But no matter. "The market fundamentals remain strong," he went on, "with [housing] demand continuing to exceed supply [and] with the Government intent on stimulating the sector by accelerating land availability."
- Phew! The spike in mortgage interest rates – up above 11.5% now for subprime UK buyers – hasn't dented the fundamentals of Britain's never-ending bubble in house-prices. Nor has the £6,300 drop in average asking prices just reported by
RightMove. Nor has the "classic reckless lending scandal" spotted by
Which? magazine. One couple earning £24,000 p.a. between them was recently "encouraged" to state earnings of £43,500 instead!
- And yet, as Clare himself added, "secondary markets" such as Birmingham city centre facing "pricing pressures" due to an oversupply of flats and apartments. Just fancy that! You can't find a million Polish plumbers when you need them most.
- Over in the US housing market, sales of existing homes just slumped at their fastest rate in 16 years according to data released Tuesday. Consumer confidence sank to a two-year low. But so what? "It could have been worse," said one analyst, and Wall Street had forecast worse numbers still. And besides, "the impact of the Fed's recent 50-point cut [to US rates] will not have fed through into these figures," said another cheerful number-cruncher.
- As for this tattered ball as a whole, the
International Monetary Fund (IMF) warns that "Global markets face a protracted adjustment, triggered by the collapse of the subprime US housing market." But why worry?
- "Although the dislocations, especially to short-term funding markets, have been large and in some cases unexpected," the IMF report says, "the event hit during a period of above-average global growth." What's more, added Rodrigo Rato, the IMF's managing director, in a Moscow press conference Tuesday, "the evolution of recent days is moving towards normalisation."
- "The most important financial institutions have enough capital to withstand the shock," Rato explained. And amid the crisis in confidence and "state of turbulence" hitting the financial sector, "we welcome the actions of central banks to maximise liquidity," he announced.
- So yes – once again – it's "Hurrah!" for cheap money today. Even the Bank of England, led by Mervyn 'Tight Money' King, has climbed aboard the Reflation Express. Today marks an historic day for the Old Lady, as she puts £10 billion in 90-day loans up for auction, accepting bids from banks and building societies with only mortgage-backed bonds required as collateral.
- The Trimmer, no doubt in his last few days in office, is still sticking with his "tough love" approach, however. The BoE is demanding an interest rate of 6.75% on these 3-month loans, fully 100 basis points above the Old Lady's base rate, and more than 40 points above the open market "Libor" rate.
- Put another way, "the only banks for which it would be rational to take advantage of the Bank's auction," says the BBC's business editor
Robert Peston, "would be those smaller banks in danger of running out of money and to which the other bigger banks don't dare lend."
- And there aren't many of those smaller banks "in danger of running out of money" stalking your local High Street. Right?
- "Whatever system is put in place to safeguard deposits following the run on Northern Rock," says a letter to the Financial Times, "it is important that it is understandable to savers. I wonder how many savers understood the workings of the Financial Services Compensation Scheme before its recent coverage in the press?"
- In truth, the cold, hard, ugly fact remains: protecting your money is your own affair, gentle reader. Any promise of a future return guarantees that your cash is at risk...even if it's just sitting "safe" in a low-interest bank account! But that's the trouble with credit bubbles; not that they burst (which is certain) but that everyone forgets about risk in the meantime.
- Does that include you, gentle reader? Is your money safe today?
- "Britain's deposit protection scheme currently holds funds of just £4.4m," reports The Independent. The US banking insurance scheme, by comparison, holds 5,000 times as much cash for a population only five times larger!
- "The Financial Services Compensation Scheme took control of a £9m fund from its predecessor," the newspaper goes on, "but that has been gradually whittled down through payouts to depositors with collapsed credit unions. A spokesman for the FSCS said the scheme could call on up to £139m – chiefly by plundering funds set aside to cover compensation claims from other parts of the financial services industry."
- Now the tidal wave of cheap money is fast pulling back out to sea...and it seems we've all been swimming naked. Something awful, we fear, might await the last bathers to reach higher ground.
Regards
Adrian Ash
The Daily Reckoning
Adrian Ash is head of research at BullionVault.com the world's fastest-growing and best-value gold ownership service.
http://www.bullionvault.com/from/dailyreckon
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